1、Flexible Budgets andPerformance Analysis,Chapter 10,Learning Objective 10-1,Prepare a flexible budget.,Characteristics of Flexible Budgets,Planning budgetsare prepared fora single,plannedlevel of activity.,Performance evaluation is difficult when actual activity differs from the planned level of act
2、ivity.,Lets look at Larrys Lawn Service.,Characteristics of Flexible Budgets,Larrys Lawn Service provides lawn care in a planned community where all lawns are approximately the same size.At the end of May,Larry prepared his June budget based onmowing 500 lawns.Since all of the lawns are similar in s
3、ize,Larry felt that the number of lawns mowed in a month wouldbe the best way to measure overall activity for his business.,Deficiencies of the Static Planning Budget,Deficiencies of the Static Planning Budget,Larrys Planning Budget,Deficiencies of the Static Planning Budget,Larrys Actual Results,De
4、ficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,Deficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,F=Favorable variance that occurs when actual costs are less than budgeted costs.,U=Unfavorable variance
5、that occurs when actual costs are greater than budgeted costs.,F=Favorable variance that occurs when actual revenue is greater than budgeted revenue.,Deficiencies of the Static Planning Budget,Larrys Actual Results Compared with the Planning Budget,Since these variances are unfavorable,has Larry don
6、e a poor job controlling costs?,Since these variances are favorable,has Larry done a good job controlling costs?,Deficiencies of the Static Planning Budget,The relevant question is.“How much of the cost variances are due to higher activity and how much are due to cost control?”To answer the question
7、,we mustthe budget to theactual level of activity.,Deficiencies of the Static Planning Budget,How a Flexible Budget Works,To a budget,we need to know that:Total variable costs changein direct proportion to changes in activity.Total fixed costs remainunchanged within therelevant range.,Fixed,Variable
8、,Lets prepare a budgetfor Larrys Lawn Service.,How a Flexible Budget Works,Preparing a Flexible Budget,Larrys Flexible Budget,Quick Check,What should the total wages and salaries cost be in a flexible budget for 600 lawns?a.$18,000.b.$20,000.c.$23,000.d.$25,000.,Learning Objective 10-2,Prepare a rep
9、ort showing activity variances.,Activity Variances,Planning budget revenues and expenses,Flexible budget revenuesand expenses,The differences between the budget amounts are called activity variances.,Lets use budgetingconcepts to compute activity variances for Larrys Lawn Service.,Activity Variances
10、,Activity Variances,Larrys Flexible Budget Compared with the Planning Budget,Larrys Flexible Budget Compared with the Planning Budget,Activity Variances,Activity and revenue increase by 10 percent,but net operating income increases by more than 10 percent due to the presence of fixed costs.,Learning
11、 Objective 10-3,Prepare a report showing revenue and spending variances.,Revenue and Spending Variances,Flexible budget revenue,Actual revenue,The difference is a revenue variance.,Flexible budget cost,Actual cost,The difference is a spending variance.,Revenue and Spending Variances,Lets use budgeti
12、ngconcepts to compute revenue and spending variances for Larrys Lawn Service.,Revenue and Spending Variances,Larrys Flexible Budget Compared with the Actual Results,Larrys Flexible Budget Compared with the Actual Results,Revenue and Spending Variances,Spending variances,Learning Objective 10-4,Prepa
13、re a performance report that combines activity variances and revenue and spending variances.,Now,lets use budgetingconcepts to combine the revenue and spending variances reports for Larrys Lawn Service.,A Performance Report Combining Activity and Revenue and Spending Variances,A Performance Report C
14、ombining Activity and Revenue and Spending Variances,A Performance Report Combining Activity and Revenue and Spending Variances,50 lawns$75 per lawn,50 lawns$30 per lawn,$43,000 actual-$41,250 budget,A Performance Report Combining Activity and Revenue and Spending Variances,Performance Reports in No
15、n-Profit Organizations,Non-profit organizations may receive funding from sources other than the sale of goods and services,so revenues may consist of both fixed and variable elements.,Universities,Tuition and fees,Donations,State funding,Endowments,Performance Reports in Cost Centers,Performance rep
16、orts are often prepared for cost centers.These reports should be prepared using the same principles discussed so far,except for the fact that these reports will not contain revenue or net operating income variances.,Learning Objective 10-5,Prepare a flexible budget with more than one cost driver.,Mo
17、re than one cost driver may be needed toadequately explain all ofthe costs in an organization.,The cost formulas usedto prepare a flexiblebudget can be adjustedto recognize multiplecost drivers.,Flexible Budgets with Multiple Cost Drivers,Because of the large unfavorable wages and salaries spendingv
18、ariance,Larry decided to add an additional cost driver for wages and salaries.The variance is due primarily to the number of hours required for the additional edging and trimming.So Larry estimates the additional hours and builds those hours into both his revenue and expense budget formulas.,Flexibl
19、e Budgets with Multiple Cost Drivers,Flexible Budgets with Multiple Cost Drivers,Larrys Budget Based on More than One Cost Driver,Learning Objective 10-6,Understand common errors made in preparing performance reports based on budgets and actual results.,Some Common Errors,The most common errors when
20、 preparing performance reports are to implicitly assume that:1.All costs are fixed,or that;All costs are variable.,Common Error 1:Assuming All Costs Are Fixed,Faulty Analysis Comparing Budgeted Amounts to Actual Amounts,Common Error 2:Assuming All Costs Are Variable,Faulty Analysis that Assumes All Budget Items Are Variable,End of Chapter 10,
